HBA-ATS H.B. 2779 76(R)    BILL ANALYSIS


Office of House Bill AnalysisH.B. 2779
By: Pitts
Financial Institutions
3/22/1999
Introduced



BACKGROUND AND PURPOSE 

In 1967, the Texas Legislature enacted Title 79, V.T.C.S., otherwise known
as the Texas Credit Code.  The statute was later revised and rewritten as
the Texas Credit Title.  Like its predecessor, the law limits the amount of
interest that can be charged by a creditor for a loan or an extension of
credit.  For consumer loans, a lender may charge a contract rate of 10
percent a year.  Alternatively, a lender may charge a rate based on a
weekly, monthly or quarterly ceiling, which is currently set at 18 percent
per year.  In the context of commercial loans, the law provides that a
lender may charge a maximum rate of 28 percent for a loan amount greater
than $250,000.   Interest in excess of the amounts allowed by law
constitutes usury.  If the lender charges and receives interest greater
than twice the amount permitted by the Texas Credit Title and that is not
otherwise authorized by law, the lender will also be liable to the borrower
for the principal amount, the interest and all other amounts charged and
received. 

The Texas Credit Title permits a type of commercial loan known as a
"qualified commercial loan." A qualified commercial loan is a commercial
loan in the original principal amount of $3,000,000 or more, or a renewal
or extension of a commercial loan in the original principal amount of
$3,000,000 or more, whether the principal amount of the loan at the time of
its renewal or extension is $3,000,000 or more.  The important feature of a
qualified commercial loan is that the lender and borrower may contract for
additional charges for incentives such as the option to convert to equity,
to purchase equity, and to share in the revenues or profit without fear of
running afoul of the usury laws because the Texas Credit Title does not
consider these additional charges as interest.  These incentives are
frequently used by small and "start-up" businesses to provide capital for
their growth. A typical incentive in which lender participation is
determined by the appreciation in value of the borrower or the borrower's
assets was not included among the types of equity participation, however. 

H.B. 2279 amends Title 79, V.T.C.S., to include appreciation in value among
the available incentives for which parties to a qualified commercial loan
agreement are authorized to charge additionally without the charges being
considered interest.  In addition, this bill amends Section 306.101(b),
Finance Code, to include appreciation in value among those incentives for
which parties to a qualified commercial loan agreement are authorized to
contract. 

RULEMAKING AUTHORITY

It is the opinion of the Office of House Bill Analysis that this bill does
not expressly delegate any additional rulemaking authority to a state
officer, department, agency, or institution. 

SECTION BY SECTION ANALYSIS

SECTION 1.  Amends Article 1H.101(b), Title 79, V.T.C.S. (Article
5069-1H.101, V.T.C.S.), to include appreciation in value among the
available incentives for which parties to a qualified commercial loan
agreement (loan agreement) are authorized to charge additionally without
the charges being considered interest. 

SECTION 2.  Amends Section 306.101(b), Finance Code, to include
appreciation in value among those incentives for which parties to a
qualified commercial loan (loan) agreement are authorized to contract. 

 SECTION 3.  (a) Effective date for SECTION 1: upon passage, but only if
the Act of the 76th Legislature, Regular Session, 1999, relating to
nonsubstantive additions to and corrections in enacted codes does not take
effect.   

(b) Effective date for SECTION 2: September 1, 1999, but only if the Act of
the 76th Legislature, Regular Session, 1999, relating to nonsubstantive
additions to and corrections in enacted codes takes effect. 

SECTION 4.  Emergency clause.